Morgan Stanley Sees Upside in Unibail-Rodamco

Real estate stocks are no longer in fashion. Since their peak in July 2016, the sector is down c10% in Europe. Yet Morgan Stanley’s analyst consider some names offer value – Unibail-Rodamco is one of them.

In a report published on Jan 9, they raise a key question: is the current de-rating of UL temporary or more permanent. The thing is that some of the drivers of this de-rating are fundamentals and quite puzzling (falling yields, high leverage, e-commerce penetration).

Yet, to MS’s analysts, the stock offers 16% upside potential, based on the rise of capital value, NAV growth and EPS growth that should remain solid over the medium term. The question of « outsized returns » is no longer on the table, but the company « still offers a better return than the sector ».

The 2 keys reasons to overweight the stock, with a target price of €260, are as follows:

1/ The stock « de-rated more than peer group. Unibail- Rodamco has seen a significant de-rating relative to European property shares and relative to the broader European equity market (MSCI Europe). We think that some of that de-rating is owing to bond yield anxiety, which our work suggests is temporary. »

2/ « Attractive return profile. The group’s quality portfolio, profitable development pipeline and solid rental growth profile should drive above-average returns over the next couple of years, even if we could see more volatility in EPS growth owing to the timing of the increasingly chunky development projects. »

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